Asset Class Choices

Real estate and the stock market are the best asset class choices. For diversification, you should invest in both.

Real estate

Epicprofessionals.com says: "real estate investing has created more millionaires than any other investment vehicle."

Prlog.org says: "It's no accident that 85% of all wealthy Americans built their fortunes with real estate investments."

Gallup.com says: "Upper-income Americans are much more likely to say real estate and stocks are the best investments, possibly because of their experience with these types of investments."

Respect successful investors. Real estate can be a wise investment.

Stocks

The S&P 500 Index, which is a broad stock market measure, has had annual gains of 6.51%. Dividends make the return even higher:

Most individual investors and most fund managers underperform the S&P 500 Index. They are flummoxed by the relentless flood of misinformation from technicians, analysts, and pundits.

Technicians cite chart patterns and critical price levels. However, they never provide convincing evidence these are meaningful.

Analysts tell which stocks they like or dislike and cite well-known facts for justification. This level of analysis is inadequate for picking winners and losers.

Pundits explain market behavior by citing news, but this is a gross oversimplification. Market behavior is determined by many overlapping fundamental, technical, and psychological factors.

Nevertheless, there are pearls of wisdom in the sea of drivel. The January Barometer is a useful tool. There really are Santa Claus Rallies (timing). Price trends in securities persist (tests).

The Treasury bond Strategy

The 10-year Treasury bond
yield has a history of low-volatility trends that persist for many years:

This is not a random walk. In a random walk, average trend lengths would be twice the threshold (tests). However, analyzing the data with
TRENDS.BAS shows trend lengths are much greater than twice the threshold:

The yield averaged 4.57%, which is below the return of 6.51% plus dividends from stocks. Investors abide the inferior performance of bonds, believing the lower volatility of bonds makes them less risky than stocks.

Respect successful investors. Warren Buffett said volatility is not the same as risk. Buying long-term bonds during a yield uptrend is risky even though volatility is low, because the yield is likely to continue rising and drive bond prices down.

On the other hand, a yield downtrend will drive bond prices up. The iconoclastic conclusion is investors could buy long-term bonds for capital gains rather than income.

Gold

Pundits say gold is a safe investment, but it fell from an average of $615.00 in 1980 to an average of $271.04 in 2001. For several years inflation in gold has exceeded its long-term rate, suggesting gold might be in a bubble:

Gold yield is subject to interpretation. The price was flat for many years and then rose intermittently for many years. Using all data in the chart, the yield was a puny 2%. Ignoring the early years, the yield averaged 5%, which is below the return of 6.51% plus dividends from stocks.